© 2008 Dannemann Siemsen. All rights reserved. BRAZILIAN FRANCHISE LAW NO. 8,955/94 Date: 17/04/09 Name: Luciana Bassani E-mail: [email protected]

© 2008 Dannemann Siemsen. All rights reserved.

BRAZILIAN FRANCHISE LAW NO. 8,955/94 BRAZILIAN FRANCHISE LAW NO. 8,955/94

Date: 17/04/09Name: Luciana BassaniE-mail: [email protected]

Date: 17/04/09Name: Luciana BassaniE-mail: [email protected]


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Data as of 2008:Data as of 2008:

1,379 franchise networks

71,954 units (outlets)

$ 24,458 billion in revenue

4th largest country in the world (no. of units)

2007 x 2008 Growth = 19,5%

1,379 franchise networks

71,954 units (outlets)

$ 24,458 billion in revenue

4th largest country in the world (no. of units)

2007 x 2008 Growth = 19,5%


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Presence of International NetworksPresence of International Networks

Foreign Networks

11%

Brazilian Networks

89%


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Presence of International NetworksPresence of International Networks

Argentina

Costa Rica

United States

Canada

EnglandSpain

France

Portugal

Italy – 2%

Switzerland

Japan


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RANKING – Size of the Networks – 2008RANKING – Size of the Networks – 2008

Ranking Network SegmentTotal Units

1º O BOTICÁRIO Cosmetics & Perfume 2.667

2º KUMON Education & Training 1.555

3º WIZARD IDIOMAS Language Schools 1.246

4º COLCHÕES ORTOBOM Furniture, Decorations & Gifts 1.149

5º ESCOLAS FISK Language Schools 966

6º L’ACQUA DI FIORI Cosmetics & Perfume 966

7º HOKEN Beauty, Healthcare & Natural Products 898

8º CCAA Language Schools 805

9º MICROLINS Education & Training 745

10º AM PM MINI MARKET Business, Services and Convenience 725

11º BOB’S Food 659

12º JET OIL Automotive Services 622

13º CACAU SHOW Food 615

14º ÁGUA DE CHEIRO Cosmetics & Perfume 580

15º MCDONALD’S Food 549

16º ESTAPAR Automotive Servies 518

17º BR MANIA Business, Services and Convenience 517

18º CNA Language Schools 480

19º DROGARIAS FARMAIS Beauty, Healthcare & Natural Products 470

20º CASA DO PÃO DE QUEIJO Food 450


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Brazilian Franchise LawBrazilian Franchise Law

Brazilian Law No. 8,955/94 (the “Brazilian Franchise Law") governs all franchise relationships that are "established and operated in the Brazilian territory."

In fact, the Brazilian Franchise Law solely governs the content of the Franchise Offering Circular (“FOC”).

Brazilian Law No. 8,955/94 (the “Brazilian Franchise Law") governs all franchise relationships that are "established and operated in the Brazilian territory."

In fact, the Brazilian Franchise Law solely governs the content of the Franchise Offering Circular (“FOC”).


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Legal Definition of Franchise AgreementsLegal Definition of Franchise Agreements

Article 2 of the Brazilian Franchise Law defines a commercial franchise as

"a system whereby a franchisor grants to franchisee the right to use a certain trademark or patent, associated to the right to distribute products or services on an exclusive or semi-exclusive basis and, possibly, also the right to use know-how related to the implantation and management of a business or operating system developed or used by franchisor, in exchange for direct or indirect compensation, without,

however, being characterized as an employment relationship."

Article 2 of the Brazilian Franchise Law defines a commercial franchise as

"a system whereby a franchisor grants to franchisee the right to use a certain trademark or patent, associated to the right to distribute products or services on an exclusive or semi-exclusive basis and, possibly, also the right to use know-how related to the implantation and management of a business or operating system developed or used by franchisor, in exchange for direct or indirect compensation, without,

however, being characterized as an employment relationship."


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Deadline to Deliver FOCDeadline to Deliver FOC

Article 4 of the Franchise Law requires that a Franchise Offering Circular (“FOC”) be delivered to the prospective franchisee, at least ten (10) days prior to the execution of any binding document related to the franchise and/or receipt of any payment by franchisor.

The statute of limitations for a franchisee to assert a claim of non-compliance is two years from the delivery of the Offering Circular.

Article 4 of the Franchise Law requires that a Franchise Offering Circular (“FOC”) be delivered to the prospective franchisee, at least ten (10) days prior to the execution of any binding document related to the franchise and/or receipt of any payment by franchisor.

The statute of limitations for a franchisee to assert a claim of non-compliance is two years from the delivery of the Offering Circular.


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Consequences of FailureConsequences of Failure

A failure by franchisor to provide a prospective franchisee

with the appropriate FOC renders the agreement void and gives a franchisee the right to demand a refund of all amounts paid by franchisee, plus recovery of damages.

Franchisors tend to be conservative in relation to this requirement as the local law provides for a severe penalty in the event of failure to comply with this legal obligation.

Key due diligence issue for the acquisition of a franchise system in Brazil.

A failure by franchisor to provide a prospective franchisee

with the appropriate FOC renders the agreement void and gives a franchisee the right to demand a refund of all amounts paid by franchisee, plus recovery of damages.

Franchisors tend to be conservative in relation to this requirement as the local law provides for a severe penalty in the event of failure to comply with this legal obligation.

Key due diligence issue for the acquisition of a franchise system in Brazil.


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FOC Content: 15 items (Article 3) FOC Content: 15 items (Article 3)

(1) A summary of the background of franchisor;

(2) Balance sheets and financial statements of the franchisor for the two preceding years (no need to be audited);

(3) Description of all pending lawsuits involving the franchisor, its controlling companies, subfranchisors, and the owners of licensed trademarks, patents and copyrights, and other franchisees or ex-franchisees relating to the franchise agreement (this applies to lawsuits filed worldwide);

(1) A summary of the background of franchisor;

(2) Balance sheets and financial statements of the franchisor for the two preceding years (no need to be audited);

(3) Description of all pending lawsuits involving the franchisor, its controlling companies, subfranchisors, and the owners of licensed trademarks, patents and copyrights, and other franchisees or ex-franchisees relating to the franchise agreement (this applies to lawsuits filed worldwide);


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FOC ContentFOC Content

(4) Detailed description of the business; (5) Characteristics of the "ideal franchisee";

(6) Requirements regarding the direct involvement of the franchisee;

(4) Detailed description of the business; (5) Characteristics of the "ideal franchisee";

(6) Requirements regarding the direct involvement of the franchisee;


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(7) Specifications regarding: (a) estimated initial investment (b) initial affiliation fee or franchise fee and (c) estimated cost of the facilities;

(8) Clear information regarding periodic fees (royalties; advertising fee; minimum insurance coverage amounts, etc.);

(9) Complete listing of all the franchisees and ex-franchisees within the last twelve months (this includes all international franchisees);

(7) Specifications regarding: (a) estimated initial investment (b) initial affiliation fee or franchise fee and (c) estimated cost of the facilities;

(8) Clear information regarding periodic fees (royalties; advertising fee; minimum insurance coverage amounts, etc.);

(9) Complete listing of all the franchisees and ex-franchisees within the last twelve months (this includes all international franchisees);


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(10) With respect to the territory: (a) exclusivity or a right of first refusal; and (b) if the franchisee has the right to sell or render services outside its territory or outside Brazil;

(11) List of required suppliers;

(12) Description of services and products offered to the franchisee by the franchisor (supervision; training; franchise manuals; assistance on the selection of the location; layout and architectural plans of the facility; etc.);

(10) With respect to the territory: (a) exclusivity or a right of first refusal; and (b) if the franchisee has the right to sell or render services outside its territory or outside Brazil;

(11) List of required suppliers;

(12) Description of services and products offered to the franchisee by the franchisor (supervision; training; franchise manuals; assistance on the selection of the location; layout and architectural plans of the facility; etc.);


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(13) Status of the licensed trademarks and patents with the

Brazilian Patent Office - INPI;

(14) Situation of franchisee after termination of the franchising agreement, regarding: a) know-how or industrial secrets; and b) non–competition obligations;

(15) Draft of the standard franchise agreement, as well as

the preliminary franchise agreement, if any.

(13) Status of the licensed trademarks and patents with the

Brazilian Patent Office - INPI;

(14) Situation of franchisee after termination of the franchising agreement, regarding: a) know-how or industrial secrets; and b) non–competition obligations;

(15) Draft of the standard franchise agreement, as well as

the preliminary franchise agreement, if any.


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FOCFOC

Generally, foreign franchisors may use their international FOC, with an addendum containing the additional Brazilian requirements;

Statement of Delivery of the FOC in accordance with Brazilian law is essential for the purposes of the INPI;

Generally, foreign franchisors may use their international FOC, with an addendum containing the additional Brazilian requirements;

Statement of Delivery of the FOC in accordance with Brazilian law is essential for the purposes of the INPI;


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Recordal at the INPIRecordal at the INPI

Renders the agreement effective against third parties;

Allows remittance of royalties to the foreign franchisor;

Qualifies franchisee for tax deduction;

Franchisor must have at least applied for registration of its trademarks in Brazil, at the INPI;

The INPI’s prerogative: to decide upon the validity of the

licensed trademarks in Brazil. Thus, the related INPI serial numbers must be listed in the agreement.

Renders the agreement effective against third parties;

Allows remittance of royalties to the foreign franchisor;

Qualifies franchisee for tax deduction;

Franchisor must have at least applied for registration of its trademarks in Brazil, at the INPI;

The INPI’s prerogative: to decide upon the validity of the

licensed trademarks in Brazil. Thus, the related INPI serial numbers must be listed in the agreement.


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Official forms provided by the INPI;

Franchise Agreement and its translation into Portuguese, containing a list of the licensed trademarks with the INPI application/registration numbers;

Statement of Delivery of the FOC; Copy of the Articles of Association of franchisee.

Official forms provided by the INPI;

Franchise Agreement and its translation into Portuguese, containing a list of the licensed trademarks with the INPI application/registration numbers;

Statement of Delivery of the FOC; Copy of the Articles of Association of franchisee.


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Legal term of 30 days - in practice, 40 days - Certificate of Recordal or an office action requesting further details and clarifications regarding the agreement.

Legal term of 30 days - in practice, 40 days - Certificate of Recordal or an office action requesting further details and clarifications regarding the agreement.


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Registration with the Central BankRegistration with the Central Bank

After the Certificate of Recordal is issued, the agreement must be registered with the Brazilian Central Bank for remittance of payments. This registration is a very simple procedure and can usually be accomplished in about 2 days.

After the Certificate of Recordal is issued, the agreement must be registered with the Brazilian Central Bank for remittance of payments. This registration is a very simple procedure and can usually be accomplished in about 2 days.


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Choice of Law and JurisdictionChoice of Law and Jurisdiction

The parties are free to select Italian law and jurisdiction to govern the franchise relationship.

However, there are practical difficulties toward enforcing foreign decisions in Brazil (necessary approval by the Superior Court of Justice in Brazil; homologation of foreign judgment” - exequatur).

The parties are free to select Italian law and jurisdiction to govern the franchise relationship.

However, there are practical difficulties toward enforcing foreign decisions in Brazil (necessary approval by the Superior Court of Justice in Brazil; homologation of foreign judgment” - exequatur).


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Choice of Law and JurisdictionChoice of Law and Jurisdiction

Examples of requirements for enforcement of a foreign decision:

(a) evidence that the judgment complies with all legal formalities in Brazil, as the Foreign judgment cannot be contrary to Brazilian public policy and local practices;

(b) the decision must be final, with no possibility of further appeal;

(c) notarized, legalized and translated; and

(d) the Brazilian party must have been served through “letters rogatory” in accordance with Brazilian formalities.

Examples of requirements for enforcement of a foreign decision:

(a) evidence that the judgment complies with all legal formalities in Brazil, as the Foreign judgment cannot be contrary to Brazilian public policy and local practices;

(b) the decision must be final, with no possibility of further appeal;

(c) notarized, legalized and translated; and

(d) the Brazilian party must have been served through “letters rogatory” in accordance with Brazilian formalities.


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Franchise System M&AFranchise System M&A

Confidentiality requirements: sensitive aspect especially when the buyer is a competitor (strategic buyer) and not a financial buyer - NDA;

Key due diligence (“DD”) issues:

(i) if deadline to deliver FOC was observed;

(ii) if the FOC comprises the Brazilian Franchise law requirements;

(iii) the seller’s right to assign the franchise agreement without the prior consent of franchisees;

Confidentiality requirements: sensitive aspect especially when the buyer is a competitor (strategic buyer) and not a financial buyer - NDA;

Key due diligence (“DD”) issues:

(i) if deadline to deliver FOC was observed;

(ii) if the FOC comprises the Brazilian Franchise law requirements;

(iii) the seller’s right to assign the franchise agreement without the prior consent of franchisees;


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(iv) ownership of the licensed trademarks (or other IP rights) registered with the INPI by franchisor or other legal entity being acquired (in-depth investigation of IP rights: if seller is merely a licensee of a trademark rather than the owner, license agreement must be assigned);

(v) any existing or threatened litigation, specially involving past, current and disassociated franchisees or with regard to IP rights;

(vi) statistics related to renewals and non-renewals of franchises and recent growth of units;

(iv) ownership of the licensed trademarks (or other IP rights) registered with the INPI by franchisor or other legal entity being acquired (in-depth investigation of IP rights: if seller is merely a licensee of a trademark rather than the owner, license agreement must be assigned);

(v) any existing or threatened litigation, specially involving past, current and disassociated franchisees or with regard to IP rights;

(vi) statistics related to renewals and non-renewals of franchises and recent growth of units;


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(vii) frequency of the franchisor’s royalty or revenue audits of its franchisees and its results.

Confidentiality related to DD conducted: knowledge could lead franchisees to insert themselves into the sales process looking for concessions.

Reps & Wars specifically related to the purchase of a franchise system: (i) internal operations of the system; (ii) financial and non-financial condition of its franchisees; (iii) mandatory and or regulatory compliance (FOC, licenses and authorizations), etc.

(vii) frequency of the franchisor’s royalty or revenue audits of its franchisees and its results.

Confidentiality related to DD conducted: knowledge could lead franchisees to insert themselves into the sales process looking for concessions.

Reps & Wars specifically related to the purchase of a franchise system: (i) internal operations of the system; (ii) financial and non-financial condition of its franchisees; (iii) mandatory and or regulatory compliance (FOC, licenses and authorizations), etc.


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Advising Franchisees of the Transaction: (i) through a planned and coordinated effort; (ii) if public disclosure requirements are not applicable, the franchisees should be advised after the closing; (iii) people skilled at preparing these types of disclosures should be consulted; (iv) franchisee associations or the franchisee advisory council could be very valuable.

Avoid: concessions and/or modifications to some or all the franchise agreements. This may occur if contractual the parties have not properly prepared the transaction disclosure to franchisees.

Advising Franchisees of the Transaction: (i) through a planned and coordinated effort; (ii) if public disclosure requirements are not applicable, the franchisees should be advised after the closing; (iii) people skilled at preparing these types of disclosures should be consulted; (iv) franchisee associations or the franchisee advisory council could be very valuable.

Avoid: concessions and/or modifications to some or all the franchise agreements. This may occur if contractual the parties have not properly prepared the transaction disclosure to franchisees.


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BRAZILBRAZIL

Obrigada! Obrigada!

Documents

© 2008 Dannemann Siemsen. All rights reserved. BRAZILIAN FRANCHISE LAW NO. 8,955/94 Date: 17/04/09 Name: Luciana Bassani E-mail: [email protected]